Significant overvaluation in some of the world’s leading financial centers has opened a number of real estate markets to housing bubble risks. There are some economic reasons why this is happening now.

For starters, investing in tangible assets – including antiques, art, gold bullion, other collectibles and, of course, real estate – has long been regarded as a sound strategy for hedging against economic and market uncertainty. So today, when more than a third of all government bonds offer negative yields – representing $11 trillion of global debt – many people have turned to real estate as a safe haven. It comes as no surprise, then, that certain urban housing markets would be overheating.

6 Cities at Most Risk of a Housing Bubble

While the majority of world cities are significantly overvalued, six global financial centers in particular are at highest risk of a housing bubble – Vancouver, London, Stockholm, Sydney, Munich and Hong Kong (from highest to least risk) – according to the 2016 UBS Global Real Estate Bubble Index, which tracks the fundamental valuation of housing markets, the valuation of cities relative to their country and certain economic distortions (lending and building booms). In these six markets, home prices have soared nearly 50% on average since 2011; by comparison, home prices in the other financial centers included in the Index have risen by less than 15%.

Source: UBS Global Real Estate Bubble Index: For Housing Markets of Select Cities 2016

Price Drivers

Excessively low interest rates is one factor that has driven these six cities to the brink of a bubble. There are two things to notice: While consumers look at interest rates because lower rates reduce the overall cost of buying a home, investors pay especially close attention because rate changes make alternative investments more or less attractive. For example: Because low interest rates mean lower monthly payments on real estate, they tend to be good news for investors looking to maximize their returns. As interest rates rise, the expected rate of return can drop, making other investments more appealing.

Other factors behind soaring home prices in these cities include capital shifting towards emerging economies, weakening commodity prices and demand from foreign investors for local properties. Sydney, for example, has been a target for Chinese investors in recent years. “When combined with rigid supply as well as sustained demand from China, this has produced an ideal setting for excesses in house prices,” says Claudio Saputelli, head of global real estate in the chief investment office at UBS Wealth Management.

Timing and Investment Outlook

There is no way to know if – and when – a bubbling real estate market may burst.

“Even in the cities with the clearest signs of a real estate bubble, it is not possible to predict exactly the timing and duration of a correction,” says Saputelli, who notes also that a major price correction could be triggered at any time by higher interest rates, a sharp increase in supply or shifts in the international flow of capital.

With timing uncertainty, the situation is tenuous at best, and Saputelli urges caution for investors in these real estate markets. “A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices. Investors in overvalued markets should not expect real price appreciation in the medium to long run.”

The Bottom Line

While U.S. urban centers escaped being named on the Index’s list of cities most at risk for a housing bubble, San Francisco did land at number seven as an “overvalued” housing market. Real estate prices in this California city have increased by more than 50% since 2011. Indeed, San Francisco is one of the most expensive housing markets in the country, with an average home price of $1,672,100, according to a recent study from real estate firm Coldwell Banker.

California cities, incidentally, took all top 10 spots on the Coldwell Banker list, with Saratoga – located about 50 miles south of San Francisco – coming in at number one, with an average home price of $2,453,718. San Francisco also has one of the highest costs of living in the country, following only New York City (Manhattan); Sunnyvale, Calif. (just 40 miles outside San Francisco); and Honolulu.

Other U.S. cities named in the Index include Boston and New York, which are both listed as “fair-valued,” and Chicago, which is considered “undervalued.” (See also Top 10 Most Expensive Cities in the U.S. and Most Expensive Housing Costs Around the World.)